A Refiner Benefiting From Harvey--But for How Long?
Best idea HollyFrontier's (HFC) shares jumped on Aug. 29. As a pure-play midcontinent refiner out of the path of Hurricane Harvey, it stands to benefit from the strengthening of product margins (WTI 3-2-1 to $23/barrel from $18/bbl last week) and the widening of the WTI/Brent spread ($5/bbl from $3/bbl a few weeks ago) due to refinery outages on the Gulf Coast. Still, it remains to be seen how sustainable these price improvements are. Ultimately, how much capacity will be offline, and for how long, will largely determine whether or not benefits accrue to HollyFrontier for longer than a few days. Early indications are that much of the roughly 4 million barrels per day of refining capacity in the Houston/Texas Gulf Coast region will be affected to some degree, either directly through flooding or indirectly through inability to secure feedstock as key shipping channels are closed. Disruption of flows throughout the region could potentially affect a further 3.5 mmbd of refining capacity in Louisiana, while preventing the export of 1.8 mmbd on average of refined product from the Gulf Coast. Our rough modelling, assuming refinery outages last longer than waterway disruptions, suggests the net impact of the hurricane will result in a build in crude inventories and a draw in product inventories, supporting the early price movements.
That said, the timing remains problematic. There is only one week remaining in the summer driving season before demand typically wanes and refining utilisation falls. As such, the impact of lost capacity will be felt less than it would have been a couple months ago. Moreover, inventories of gasoline and distillate remain near the upper end of the five-year averages, further blunting the impact of lost capacity.
We plan to update our model with the recent increase in margins and widening of differentials, which will likely increase our earnings estimates for 2017, but we do not anticipate a change in our fair value estimate or narrow moat rating.
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